Treasury Beyond Borders

Recession, stagflation, and other challenges

Being pragmatic, Badhwar believes it is important to ask: “What if we went into a global recession?” It’s not as far-fetched as it may sound, he says. While fully-fledged global recessions are rare – only four have occurred since WWII – never say never!

Historically, the average US Federal Reserve rate cut cycle lasts about 44 months. “We’re only about eight months in,” Badhwar noted. “So clearly, if history is any guide, there are more cuts to come.”

Worse still would be a descent into stagflation – a toxic mix of high inflation and rising unemployment/stagnant growth. “That’s even harder for central banks to respond to because it limits their ability to cut rates and support growth,” Badhwar explains.

A downturn could also spark knock-on effects in FX and credit markets. The US dollar, which historically strengthens during crises, could for example squeeze overseas earnings for US-headquartered firms. Emerging market currencies may come under pressure – which, in turn, could hit companies with significant import costs. “For import-heavy corporates in emerging markets, that’s an additional squeeze,” Badhwar cautions.

And then there’s the issue of debt. “Corporate credit spreads are already at their highest levels since late 2024, he warns. “For highly leveraged companies – especially those that raised cheap debt during the pandemic – this is a real concern. They’re now facing higher Treasury yields and wider spreads. It’s a refinancing double whammy.”

The glass-half-full perspective

But it’s not all doom and gloom. If risks are redrawing the map, so too are opportunities.

“There is a silver lining,” Badhwar notes. “We’re seeing a realignment of supply chains benefiting markets like Vietnam, Bangladesh, and India. That opens the door for corporates to expand their geographic presence to meet customer demand.”

There’s a sectoral shift too. Infrastructure and defence investment in Germany, for instance, could spark growth across adjacent industries. From engineering and construction to energy, logistics, and advanced manufacturing. As governments ramp up spending in these areas to address security concerns and modernise national infrastructure, corporates operating in connected sectors may find themselves facing both new exposures and new growth opportunities.

Elsewhere, there is AI to consider, which could provide a real boost from a risk management perspective, Badhwar believes. “Companies are using it to improve productivity and forecast future cash flows more accurately. And the more certain they are about their cash flow, the more confidently they can manage risk and hedge ratios – it becomes a virtuous circle.”

Meanwhile, the steepening yield curve is also presenting an opportunity for firms to reassess their fixed versus floating debt mix using swaps (more on this later). And in FX markets, the dollar’s recent rollercoaster – up 10%, then down 6% – has led to a surge in hedging via options. “Flexibility is the need of the hour,” Badhwar emphasises, “and options offer that ability to pivot as required.”

Liquidity under pressure

Of course, when FX volatility spikes, liquidity also comes into question. But according to Volkan Benihasim, HSBC’s Global Head of FX, Emerging Market Rates and Commodities, the majority of corporates are not currently struggling to execute deals.

“We’ve seen a fair bit of volatility in various markets, but we’ve had no issues executing client orders – even those of a significant size,” he explains. “Of course, liquidity varies by market, and deep markets like GBP/USD or USD/MXN differ significantly from frontier currencies like the Egyptian pound or Argentinian peso. But we’ve developed tools to help clients navigate all of those scenarios.”

AI: The ‘hard-working intern’

Among the new tools alluded to by Benihasim, AI is showing real promise. “We see huge potential for AI in treasury,” said Benihasim. “Especially around analysing data volumes more efficiently.”

Indeed, in the 2024 edition of HSBC’s Corporate Risk Management Survey, 82% of respondents expected AI to support them within the next five years. Areas like forecasting, fraud prevention, and market analysis topped the list. And the forecasting call-out is no surprise, given that 93% of companies experienced financial impact due to inaccurate cash flow forecasting.

With these challenges in mind, HSBC’s own AI Markets platform uses natural language processing to deliver on-demand market insights, data, and liquidity intelligence to help inform better decision-making. “As our Global Research team put it, AI is like a ‘hard-working intern’ – great at preparing the data for treasury teams to digest. But the final decision still rests with the treasurer.”

While liquidity conditions remain manageable, what has changed significantly for treasurers is the number and type of currencies they are being exposed to. As companies redraw their supply chains due to geopolitical shifts, they’re encountering unfamiliar currencies – Thai baht, Indonesian rupiah, Malaysian ringgit, Vietnamese dong – and with these come new risks.

“Even if invoices are in US dollars, understanding the local economy, interest rate environment, and macro drivers is critical,” Benihasim suggests. “A weakening local currency could impact inflation, supplier pricing, and ultimately end costs.”

He adds that HSBC’s global network plays a vital role here, enabling local insights to be surfaced back to headquarters to provide market intelligence on tap. And the bank’s Emerging Market Currency Guide is becoming essential reading for treasurers venturing into new geographies with more exotic currencies.

A bigger, bolder FX picture

This shift in FX exposure isn’t just anecdotal. According to HSBC’s latest Corporate Risk Management Survey, nearly nine times as many treasurers expect to manage a larger share of foreign currency cash flows over the next three years than those expecting to see less. It’s a striking statistic – and one that speaks volumes about the reality treasurers now face.

“Clients need to get under the skin of these new currencies,” says Benihasim. “That means understanding regulations, liquidity, available instruments and tenors – even if you’re still paying your suppliers in USD.”

He points out that FX volatility doesn’t just affect pricing, it can also impact negotiations with suppliers, budgeting, and even hiring decisions. “It’s not just a treasury issue. It has a knock-on effect across the business.” And this is why cross-functional collaboration is more critical than ever. Risk can no longer sit in a silo, Benihasim cautions.

Proactive risk management

Another quiet evolution is happening in the way risk is managed: for many treasury teams, tackling financial risk has historically been something reactive – a bolt-on to core responsibilities like cash and liquidity. But that mindset is rapidly changing.

“The conversations we’re having now are much more strategic,” says Badhwar. “Risk management has become second nature to our clients. And that’s partly because of the increased volatility – but also because they’re growing globally. Whether it’s chasing new consumer markets or adjusting supply chains, their risk profiles are expanding.”

As a result, treasury functions are spending more time on analysis of risks upfront, in order to avoid issues before they happen where possible. And organisations are increasingly turning to tech to help them in this cause.

“As well as the forecasting developments I mentioned earlier, we’re seeing a clear move towards execution efficiency, for example,” Badhwar shares. “Around 65% of our survey respondents now use electronic trading platforms – up from 55% three years ago. That shift is particularly pronounced in Asia.”

It’s not just about speed, he notes. “Electronic tools are also giving treasurers better visibility, auditability, and control. That’s essential in fast-moving and rapidly shifting environments.”

Why FX still frustrates corporates

Despite the rise in tools and tech, FX risk remains a headache for many corporates, reflected in the survey results. “Part of the challenge is that FX is inherently dynamic,” says Benihasim. “You can have a perfect view on growth, inflation, and interest rates – and still see a currency behave unpredictably because of market positioning or geopolitical sentiment.”

He adds that information now travels faster than ever. “Markets absorb and price data in real time. That makes them efficient, yes – but also harder to anticipate. And corporates aren’t trading for alpha – they’re trying to lock in predictability.”

That’s why, as Badhwar highlighted, more companies are turning to flexible instruments like FX options. “It’s about creating breathing space. You can’t time the market perfectly, so you need tools that let you respond quickly without being locked in,” he says.

Still, Benihasim acknowledges that adopting these instruments requires groundwork. “Policy approval is often the first hurdle. But once that’s in place, we see a clear uptick in usage of options – particularly when FX volatility spikes.”

Interest rates are back

It’s not just FX markets that are keeping treasurers on their toes. As alluded to earlier, interest rate uncertainty remains one of the biggest drivers of financial risk in 2025 – not least because of the speed and scale of change.

“To put it in context,” says Badhwar, “the last time the Fed funds rate was above 5% was in 2007. The same goes for the Bank of England and the ECB. That’s a long time ago. For many treasury teams, this environment is entirely new.”

After more than a decade of ultra-low borrowing costs, it’s hardly surprising that many companies had stopped actively thinking about interest rate risk. “You can’t blame them,” Badhwar continues. “From 2009 to 2022, BoE rates were below 1%. Fed funds were effectively zero for years. And the ECB refinance rate was under 1% from 2012 to 2022. But that’s changed – and fast.”

Now, treasurers are facing a new set of questions: how to manage rising debt service costs, how to structure interest rate hedging programmes, and how to plan for a future where rate volatility may become a persistent feature of the landscape.

Naturally, the way in which companies respond to that challenge depends, in large part, on their business model.

“Some clients are comfortable running 100% fixed-rate portfolios, especially if they have large capex needs and need certainty around financial covenants,” Badhwar explains. “For them, visibility over future interest costs is essential for meeting key ratios like interest cover.”

But that’s not the case for everyone.

“If your business is tightly linked to GDP performance – say, a sector where revenues rise and fall with the economic cycle – then it can make sense to lean into floating-rate debt,” he continues. “The idea is that when revenue slows, interest rates will likely fall too, softening the impact on your bottom line.”

The mix of fixed and floating exposures is also being influenced by the evolving shape of the yield curve. “Until recently, we had an inverted yield curve, which made extending during of hedges for those who wanted to pay fixed rather attractive, which made extending duration of hedges for those who wanted to pay fixed rather attractive,” says Badhwar. “But with the curve steepening, we’re seeing more clients reconsidering their hedge durations and taking advantage of more favourable swap rates to realign their fixed-float mix with their view of the future.”

Thinking ahead

And with treasury yields as volatile as they’ve been, pre-hedging is firmly back on the radar – particularly for companies issuing debt in the capital markets.

“US 10-year Treasury yields have been swinging by 20 basis points in a single week,” Badhwar notes. “That’s significant when you’re borrowing at scale. Pre-hedging helps lock in borrowing costs and provides greater certainty when issuing debt in volatile markets.”

What’s more, treasurers aren’t just thinking in terms of vanilla interest rate swaps. Sophisticated strategies, including interest rate options and structured hedging, are now firmly in the corporate toolkit. And in some cases, companies are using cross-currency swaps to not only manage interest rate exposure, but to optimise their overall funding mix.

“We’re seeing certain corporates using synthetic structures to effectively borrow in one currency but hedge into another where rates are more attractive,” Badhwar says. “That’s particularly relevant for US-headquartered companies with Asian revenue streams. In some cases, these swaps are helping reduce funding costs by up to 200 basis points over five years. That’s by no means trivial.”

Ultimately, he adds, the new rate environment is forcing a rethink. Not just of hedging instruments, but of how risk and funding strategies align with broader business goals.

“It’s no longer just about simply minimising costs. It’s about building resilience into your capital structure,” he says. “And that means being proactive rather than reactive wherever possible.”

Expecting the unexpected

That said, with risks coming from every angle – and none of them easy to forecast – it is difficult to provide a blueprint for how treasury teams should be approaching risk and opportunity proactively. Nevertheless, there are some best practices to follow.

“There’s no such thing as a perfect risk strategy,” Badhwar says. “It really depends on what your company is trying to achieve. Sector dynamics, leverage, margins – all of these matter.”

What is universal, however, he argues, is the need to stay flexible. “You have to keep revisiting your assumptions. Be dynamic. Evaluate your exposures against your business goals and adjust your hedging strategy accordingly.”

Benihasim echoes this sentiment. “Good risk management starts with good data. Constantly reassess your exposures. Get involved early in business decisions – particularly when they affect FX markets. And make sure your risk toolkit includes flexible instruments.”

His final piece of advice is to: “Be curious. Be open to new tools, new technologies, and new ways of thinking about risk. That’s how treasury teams move from firefighting to effective and strategic forward planning. After all, the world won’t get simpler anytime soon. So, your risk strategy can’t stay static either.”